TOPIC 9: MEASURING NATIONAL INCOME

1. Gross Domestic Product (GDP) is the total market value of all

a. final goods and services produced annually within a country's borders.
b. final and intermediate goods and services produced annually within a country's borders.
c. intermediate goods and services produced annually within a country's borders.
d. final goods produced every month within a country's borders.

2. In the definition of GDP, the words "total market value" refer to total
a. dollar value at base prices.
b. dollar value at current prices.
c. subjective value.
d. objective value.

3. Which of the following illustrates double counting?

a. The total market value of the steel used to produce a car and the total market value of
the car itself are summed.
b. The total market value of tennis rackets and the total market value of tennis balls are summed.
c. The total market value of picture frames and the total market value of camera film are
summed.
d. The total market value of eyeglasses and the total market value of carpet are summed.

4. Which of the following items is a final good?

a. mustard in a deli
b. tin purchased by a tin can company
c. a sweater purchased by someone in a department store
d. a and b

5. Underground activities are not counted in GDP because

a. some underground activities are illegal and the government doesn't want to place, for instance,
drug dealers on an equal footing with small businesses.
b. there are no written records of underground activities.
c. of a decision made in the 1930s and no one has gotten around to changing it yet.
d. although it is possible to accurately measure underground activities, it is harder than
measuring above-ground activities because with the latter, one doesn't have to dig as deep.
6. Which of the following is counted in GDP?
a. the trading of 100 shares of Microsoft stock
b. the services of a real estate broker
c. government transfer payments
d. the sale of a used car

7. Which of the following would not be included in the measurement of GDP?

a. a bill from a car mechanic
b. wages of a card dealer working in a Las Vegas casino
c. commissions of a stockbroker
d. the increased value of shares of stock

8. Gross Domestic Product is computed by using

a. base-year prices.
b. wholesale prices.
c. previous-year prices.
d. current-year prices.

10. Which of the following is a nonmarket good?

a. the corn you grow in your home garden and consume
b. the clothes you sew and sell to a neighbor who pays you by writing you a check
c. the self-portrait hanging in your den
d. a and c

11. Which of the following statements is false?

a. The market value of all nonmarket goods is omitted from GDP.
b. The sale of used goods is omitted from GDP.
c. The market value of a person mowing his or her own lawn is omitted from GDP.
d. If a good is produced but not sold, it is included in GDP.

12. Net exports equals

a. exports divided by imports.
b. the sum of exports and imports.
c. exports minus imports.
d. exports during the year.

13. Macroeconomists define consumption as

a. purchases by the business sector.
b. wearing away and breakdown of capital goods.
c. the difference between imports and exports.
d. purchases by the household sector.
14. To macroeconomists, investment is mainly the purchases of goods and services
a. by businesses.
b. to hold as wealth, such as gold coins or art.
c. to hold as wealth, such as stocks and bonds.
d. by the government.

15. The expenditure approach to measuring GDP sums

a. consumption, investment, government purchases, and net exports.
b. sales, revenues, income, and wages.
c. profits, compensation of employees, consumption, and investment.
d. net exports, consumption, wages, and salaries.

16. Suppose the total market value of all final goods and services produced in economy X this year is $4
million. Of the $4 million worth of goods and services, $3 million is sold and $1 million is held in
inventory. For this year, the GDP for economy X is
a. $4 million.
b. $3 million.
c. $1 million.
d. $7 million.

17. Government purchases consist of the total dollar amount(s) spent on goods and services by the
a. federal government only.
b. state governments only.
c. local governments only.
d. federal, state, and local governments.

18. The two ways of measuring Gross Domestic Product are the __________ approach and the
__________ approach.
a. expenditure; income
b. expenditure; national product
c. national product; income
d. net national product; personal income

19. National income equals

a. wages + salaries + corporate profits + net income.
b. compensation of employees + proprietors' income + corporate profits + rental income + net
interest.
c. compensation of employees + proprietors' income + indirect business taxes + rental income + net
interest.
d. the monetary value of fringe benefits + tips + wages + profits + salaries.
20. Capital consumption allowance refers to
a. capital goods being used up in production through natural wear, obsolescence, and
accidental destruction.
b. people sending money between countries.
c. the purchase of used factories.
d. the purchase of goods that allow households to consume more services.

21. An example of income earned but not received is

a. welfare payments.
b. Social Security payments.
c. undistributed profits.
d. a and b

22. Disposable income is

a. equal to GDP minus the capital consumption allowance.
b. that portion of personal income that can be used for consumption and saving.
c. the sum of all payments to suppliers of the factors of production.
d. equal to national income.

23. Personal income is

a. equal to GDP.
b. that portion of national income that can be used for consumption and saving.
c. the sum of all payments to suppliers of the factors of production.
d. the amount of income that individuals actually receive.

24. To derive net domestic product (NDP) from gross domestic product (GDP), we must subtract
________________ from GDP.
a. the capital consumption allowance
b. gross private domestic investment
c. imports
d. inventory investment
Exhibit 7-1
Consumption expenditures $ 4,150
Federal government purchases of goods and services 850
State and local government’s purchases 331
Investment 751
Proprietors income 150
Compensation of employees 4,080
Corporate profits 134
Taxes on corporate profits 23
Rental income 31
Capital consumption allowance 295
Indirect business taxes 130
Net interest 147
Exports 300
Imports 320
Undistributed corporate profits 111
Transfer payments 66
Personal taxes 45
Dividends 0
Income Earned from the Rest of the World 252
Income Earned by the Rest of the World 1,347
Social insurance taxes 222
Statistical discrepancy 5

25. Refer to Exhibit 7-1. Which of the following summations represents GDP using the expenditure
approach?
a. $4,150 + $751 + $850 + $300
b. $4,150 + $751 + $850 - $331 + $300
c. $4,150 + $751 + $850 + $331 + $300
d. $4,150 + $751 + $850 + $331 + $300 - $320

26. Refer to Exhibit 7-1. Which of the following summations represents net domestic product?
a. GDP - $222
b. GDP - $331
c. GDP - $412
d. GDP - $295
27. Refer to Exhibit 7-1. What is the value of gross domestic product?
a. $6,062
b. $5,731
c. $3,072
d. $6,382

28. Refer to Exhibit 7-1. What is the value of net domestic product?
a. $5,840
b. $5,731
c. $5,650
d. $5,767

29. Refer to Exhibit 7-1. What is the value of national income?

a. $4,351
b. $4,252
c. $4,403
d. $4,542

30. Refer to Exhibit 7-1. What is the value of personal income?

a. $4,252
b. $4,388
c. $5,072
d. $3,996

31. Refer to Exhibit 7-1. What is the value of disposable income?

a. $3,618
b. $4,795
c. $3,727
d. $4,207

32. Real GDP is always measured in

a. cheaper dollars.
b. quality of goods produced.
c. base-year dollars.
d. nominal dollars.

33. "Economic growth" has occurred if

a. inflation rate between this year and last year is zero or less.
b. GDP this year exceeds the Real GDP this year.
 c. unemployment rate this year is above the natural rate of unemployment.
d. Real GDP this year is greater than Real GDP last year.

34. The standard definition of "recession" is

a. a period of a positive frictional unemployment rate.
b. two consecutive quarters of falling Real GDP.
c. the lowest point in a business cycle.
d. a period of negative inflation.

35. In which phase of the business cycle does a recession occur?

a. contraction
b. peak
c. recovery
d. expansion